Inflation Expectations Declining

Take a look at the following chart of the TIPS spread and note the sharp plunge in the spread that has been occurring over the last few weeks. It is now at the lowest level in 9 weeks. Clearly, there has been a change in the market's expectations regarding any onslaught of inflation pressures.

I think it no coincidence that this revised evaluation has taken place even as the commodity sector is plumbing new depths.

Just today, the GSCI scored a brand new, 16 month low!

I should also point out that interest rates have been moving steadily LOWER since the first of the year. The yield was near 3.0% when the year began. Today it ended 2.387%. That is most interesting given the Fed's steady march to wind down the Quantitative Easing program. Many pundits, traders, and investors ( including yours truly here ) believed that interest rates would begin a steady march higher once the market became convinced that the Fed was serious about this. While geopolitical tensions can produce money flows into bonds as safe havens, knocking rates lower in the process, there is obviously more at work here since the steady move lower in long term rates cannot be solely attributed to those geopolitical events.

USDA Crop Conditions

USDA released their weekly report today.

I am a bit surprised to see that the overall soybean conditions rating actually improved. I had expected that we might see a tad of deterioration ( nothing of significance ) but even that did not happen.

The percentage of the crop that is rated in the Good/Excellent category bumped up 1% from 70% to 71%. More specifically, 54% is rated Good while 17% is Excellent, which is unchanged from last week.

In going over the 18 states and their average, I can see only two states that showed any deterioration in the condition of the crop. Every other state remained unchanged from the previous week or improved. The two states showing some deterioration of the crop were Iowa and Kansas. Iowa lost one point while Kansas lost one as well.

Nationally, the crop remains ahead of last year's progress. 95% of the crop is blooming compared to 91% last year at this time and the 5 year average of 95%. 83% of the crop is setting pods compared to only 70% last year and the 5 year average of 79%.

With the regular, timely rains we have been getting, and with more rain in the forecast at times, any heat at this point will be very welcome by the bean plants. As long as they have sufficient moisture, beans like heat when setting pods. That leads to bigger individual beans and better filling.

I am hard-pressed to find anything bullish about the conditions report especially given the current forecast.

When it comes to corn, there was some slight deterioration in the crop nationally. A mere 72% ( this is said with tongue in cheek) of the crop is rated Good/Excellent with 21% Excellent and 51% Good. That is down from 73% last week.

Iowa dropped to a paltry 75% rated Good/Excellent down from 76% last week. Illinois dropped to 80% Good/Excellent from 82% last week. Indiana improved to 73% Good/Excellent compared to 72% last week.

Progress-wise corn is 70% in the Dough stage compared to 49% last year and the 5 year average of 63%. The crop nationally is 22% in the Dent stage compared to last year's 10% and the 5 year average of 27% ( something which I will admit I am confused about).

Again, heat, as long as there is sufficient moisture in the soil, will be very welcome by farmers.

The forecasts are calling for some heat through the mid-West later this week but then cooling off again by the weekend. If those forecasts hold, and the scattered rains show up as predicted, that will be ideal for these crops.

The same guys who were buying the August beans on the tight old crop supplies, are now doing the same, as expected, in the September bean contract. I am not sure what it will take for farmers to let go of some of those old crop beans that are still sitting in storage but at some point those are going to have to be moved to make room for what more and more appears to be a bin-buster.

About the only thing I can see that the bulls have that they can play at this point is talk of an early freeze. I find it interesting to read some of the bullish stories especially by some who are still holding back old crop supplies hoping for higher prices. First they talk up the heat as being stressful on the crop. Then, nearly in the same breath, they talk up an early frost. The heat ( as long as we are not talking big High Pressure Ridge ) is what the crop needs at this point to hurry it along. I should point out that both crops are generally ahead of the 5 year average in key categories ( with the exception of corn being in the dent state which is rather confusing given the earlier than normal condition in other categories).

We are probably going to have to wait until the combines start rolling to see the beans react to the size of the expected crop. In the interim, the "tight old-crop" supplies story will be repeated over and over again. It really is a tale of Two Cities ( I mean Crops).

One other thing, I will have to do some digging when I can spare a bit of time and see what kinds of margins ethanol producers have right now, especially with unleaded gasoline prices continuing their disappearing act. Unleaded scored a 6 month LOW today! Ethanol producers lose profitability as gasoline prices erode although with corn as cheap as it currently is, they can still afford to buy the stuff and turn it into fuel. Note - I HATE ETHANOL....

The idea of burning our food supply in our gas tanks is madness. I know farmers love it but I think it is a price-distorting waste of a valuable food item. If ethanol was such a good thing that it could stand in the marketplace on its own two feet, without the federal government subsiding the stuff, it would be one thing. But it is not.

Dollar Back up; Euro Back down

It does seem to be a pattern of late does it not? The Dollar keeps knocking on the door of overhead chart resistance while the Euro keeps knocking on the door leading to the cellar of downside chart support. Neither one has been able to mount a clear breakout either above or below their respective chart resistance or support levels.

In looking over the charts one has to stay with the technical indicators and go with those as far as favoring the odds for the next move. It appears that the Dollar is basing for a move higher while the Euro is basing for a move lower.

I say that because of the reading that the RSI is currently giving. Here are the charts with the first one being that of the Euro:

Note the consolidation or coiling type of pattern within the lines noted on the chart. The currency is hovering just above the 1.3350 level. Selling is coming in near 1.34 and above while buyers are evident from 1.3350 on down. Neither side currently has a distinct advantage.

However, the RSI has been tracking between near the 60 level and just above the 20 level for nearly three months now. That this indicator has been unable to get above 65 tells me that this market is weak. One would have to therefore go with the notion that the next move will be for the Euro to breakdown and test support at 1.3300. Below that is 1.3250. Personally I believe that the European monetary authorities, ( and exporters for that matter ) will not mind seeing this happen. If the market were able to clear 1.3450, we will have to revisit this thinking.

Here is the Dollar chart:

Almost the mirror opposite of the Euro is it not? Note how it is stuck just below the 81.80 level but is grinding slightly higher above the 81.40 level. The RSI has been tracking between 80 and 40 indicating a market that has internal strength.

Again, if one bases their analysis solely off of the charts, the next move in the Dollar should be higher but that means we will need to see a breach of 81.80 that is convincing from a technical analysis perspective.

Should both of these markets move accordingly, I would suspect gold will see move selling pressure. Again, geopolitical events are supporting gold ( as well as confounding currency traders ) but if that support does fade for any reason, a stronger Dollar will tend to favor weaker gold prices.

Let's see what Mr. Market gives us next.